The latest decision in the external administration of Mirabela is a reminder of the utility of the section 424 directions process for receivers, and an example of the steps to be taken in the face of competing asset claims.
The Court directed that the receivers of Mirabela were justified in distributing sale proceeds of approximately US$59.5 million in the face of a third party claim to the proceeds, provided the receivers first gave 21 days’ notice of intent to do so.
The case is a timely reminder that:
The principal assets of the receivership were company shares and loans owed. Security was granted in an amount greater than US$59.5 million. The receivers commenced a sale process for the assets. This led to the receivers entering into an asset sale agreement.
Issues arose and the receivers purported to terminate the agreement. The first buyer asserted that the agreement remained on foot, that it was entitled to specific performance, and that it had an equitable interest in the assets. The receivers, in turn, entered into a new agreement to sell the assets with a second buyer. There was no finding whether the agreement with the second buyer completed, but the result of the agreement was that the receivers held US$59.5 million as sale proceeds. The first buyer subsequently asserted an entitlement to the balance of the sale proceeds after its obligation to pay the purchase consideration under the first sale agreement was offset.
The receivers applied for directions pursuant to s 424 of the Corporations Act 2001 (Cth) which permits a receiver to apply to the court for directions in relation to any matter arising in connection with the performance of their duties.
The receivers sought directions that they were justified in entering into the second sale contract and in distributing the proceeds received under the contract. They also sought directions that they were justified in defending foreshadowed proceedings to be commenced by the first buyer.
The direction sought concerning entry into the sale contract was not granted. However, the other two directions were granted, substantially in the terms as sought.
Direction as to justification in entering the sale contact – not granted
There was considerable debate as to whether s 424 empowered the court to give directions that were retrospective in effect. The first buyer contended that there could be no retrospective approval or validation and that directions by their nature were forward looking only. The receivers recast their proposed direction to a direction that they “may act” on the sale contract as though they had entered into the contract after receiving a direction that they were justified in so doing. That formulation was crafted to avoid the question of retrospectivity. Given this, the Court was not required to offer a view as to whether s 424 empowers the Court to give directions that were retrospective in effect and declined to do so.
The Court’s decision is a reminder that the Court’s direction must have utility. The Court found that this was lacking as the receivers did not propose any action on the basis of the direction; the receivers presented their application on the basis that no obligations remained to be performed under the second sale contract (as it had completed). The Court did not consider that professional indemnity insurance concerns provided relevant utility.
Direction that the receivers are justified in distributing the proceeds received under the sale contract - granted on condition that the receivers first gave the first buyer 21 days’ notice of intent to distribute
The Court was satisfied that the proposed direction had utility as there was a question of legal judgement involving the appropriate action to take in distributing the sale proceeds rather than a mere commercial or business decision.
Direction as to defence of proposed first buyer proceedings – granted
The Court granted a direction that it would be proper for the receivers to defend the proposed first buyer proceedings.
In granting this direction, the Court was satisfied that the receivers had taken reasonable steps to form their opinion on whether the litigation was properly defensible by obtaining legal advice from a well-respected and highly competent lawyer. The Court also noted that the receivers had reasonable prospects of successfully defending the first buyer’s claim. The Court found that it was not necessary for the receivers to provide information as to the likely costs that would be involved in the proposed litigation, as the likely costs to be incurred in the defence of the first buyer’s claim were a necessary expense.
This case is a useful reminder of the scope of the s 424 direction power to clarify a receiver’s position, and statement on the principles for directions, particularly the need for utility for directions to be granted. There must be an issue calling for the exercise of legal judgment and more than a business or commercial decision. However, the fact that a legal question may have significant commercial consequences does not make the giving of directions inappropriate.
The first buyer submitted that the direction would result in the taking of steps that were difficult to unwind and would defeat its claim.
The Court held that the more general issue was whether, in the exercise of discretion, a direction should be made; that the possible impact on future adversarial proceedings was relevant but that there was no evidence that the directions were sought to secure a strategic advantage in the substantive dispute; and that the first buyer was not required or coerced into taking action.
The making of the proposed direction did not prevent the first buyer taking steps to restrain the distribution of the assets. What was required was for the receiver to communicate properly with persons making claims to give them a reasonable opportunity to ventilate bona fide claims. The receivers could take into account that despite the passage of some 11 months since the claim was first articulated, it had yet to be commenced, and needed to give notice that they intended to distribute the sale proceeds pursuant to the sale proceeds pursuant to the security.
 Re Mirabela Nickel Ltd (receivers and managers appointed) (in liq); Ex Parte Madden  WASC 335. A link to the Judgment is here https://ecourts.justice.wa.gov.au/eCourtsPortal/Decisions/DownloadDecision?id=4b2a7fe1-6eec-4551-bb2a-32ffd23af4d3.
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